Cas Sydorowitz, Chief Executive Officer of Computershare’s proxy business in Europe, shares some advice on how companies in Asia can prepare themselves for the rising tide of shareholder activism in the region.
Hong Kong-listed companies have a history of surprising their shareholders. Take the example of Boto International, a family-owned firm that had a steady, cash-generating, if unglamorous business making artificial Christmas trees – until the day it decided to take a leap into Hollywood film animation. David Webb, an independent governance activist, waged a battle to stop this radical overhaul of the business model, but to no avail. The reinvented company, Imagi International has changed business directions many times since, and has suffered a string of losses in the past 14 years.
The Boto case demonstrates why investors should challenge board decisions, but it also illustrates the obstacles to doing so. Many companies are closely held, with tight family or connected-party control of voting shares. This makes it difficult to secure enough votes to veto board decisions. The same is true in many other Asian financial centres.
Nevertheless, investor activism is on the rise in Asia. Buoyed by successes in Wall Street and elsewhere, activist investors have been on the hunt for undervalued companies in Asia; they buy up chunky stakes of 5% to 10%, then try to unite with other minority shareholders to push for performance-enhancing management changes.
In a high-profile case last year, Elliott Management Corporation, run by the American billionaire Paul Singer, launched an aggressive campaign to prevent a merger aimed at consolidating family control of one of Korea’s biggest and influential companies, Samsung Electronics.
Samsung executives fought back hard, resorting to a range of tactics including hand-delivering watermelons to individual investors’ homes to curry favour. In the end, the conglomerate was able to secure the vote necessary for a successful transaction – but only just barely. If Elliott had managed to get votes representing just an additional 2% of shareholders, the deal would have been torpedoed.
Do near-successes like this point to a new trend aimed at breaking up dynastic control of regional companies? Cas Sydorowitz, an advisor in the realm of investor activism, thinks the answer is likely no. ‘I’m not sure we’re going to see increased activism in Asia in terms of the Elliotts going after the Samsungs,’ says Sydorowitz, Chief Executive Officer of Computershare’s proxy solicitation and corporate advisory business in Europe. ‘But we are going to see a lot more active engagement. Investors want an open door.’
Engagement vs activism
Sydorowitz, originally from the US, moved to London 14 years ago as activism was spreading from Wall Street into other global financial centres. He has been running Computershare’s proxy solicitation and corporate advisory business for Europe since then, and is also supporting Asia, as companies seek advice on how to deal with the rising tide of activism.
‘I happen to sit in London but look after northern Europe and parts of Asia, including Hong Kong and Singapore,’ said Sydorowitz, who was a speaker at the recent Hong Kong Institute of Chartered Secretaries’ 10th Biennial Corporate Governance Conference 2016.
The proxy solicitation and corporate advisory team focuses on three core activities. The first is helping companies prepare for their annual general meetings, so that executives have a good understanding of what shareholders will do and how they will vote in advance of AGMs. The second is helping companies in merger and acquisition situations, including improving knowledge exchanges between a bidder and target company.
It is the third area of specialisation that is keeping Sydorowitz’s team increasingly busy: and that is helping companies defend themselves against activist investors. This includes ‘helping them understand who the activist is, what type of tactics they employ, what type of campaigns they run, and if there are any other shareholders likely to support their campaign,’ explains Sydorowitz.
As a sign of the trend, he points to Singapore, where two listed companies are currently facing down activist campaigns by hedge fund shareholders. The retailer Metro Holdings is under high-profile pressure to increase its dividends in light of excess cash on the balance sheet, while investors in Geo Energy Resources want the company to overhaul its capital structure to improve valuations.
Activist investors are not the only ones seeking deeper engagement, however. Institutional investors are doing the same, and some so-called ‘passive’ investors are generating activist campaigns. BlackRock, for example, is the world’s biggest institutional investor with some US$5 trillion of assets under management, a good portion of it in index-tracking funds, which are passive in nature. Yet BlackRock led an aggressive campaign in Hong Kong this year to stop a business overhaul whose radical nature harkens back to the Boto case. In this more recent case, the company in question, G Resources, operated a large gold mine, and one day announced that it planned to sell this key asset and use the proceeds to transform into a financial services firm.
With an 8% stake in G Resources, not only did BlackRock use its own voting rights to help influence management, but led a campaign to unite with other minority shareholders to oppose the deal. In fact, BlackRock created a website resource page for interested parties to read and react to its opposition plan, including a section titled, ‘Why shareholders should vote no’. On this same webpage, BlackRock reviewed prior value-destructive behaviour of the company. The now decommissioned webpage also gave an email link for shareholders to get in touch with BlackRock’s campaign.
While BlackRock was not able to stop the plan from going forward, it did manage to alter the terms of the deal, returning more of the cash of the mine sale to investors, rather than investing it all in the new business.
This high-profile and remarkable case received a lot of attention – in part because a rare partial victory was extracted. That said, most of the activist activities in Hong Kong focus on more pedestrian issues. According to research by Proxy Insight, a company that tracks the voting behaviour of global shareholders, in Hong Kong nearly half of all resolutions that have seen opposition from minority shareholders concern the election or re-election of directors. Investors will seek more information on a director, or vote against his/her nomination, in cases where the background or contribution to the company is unclear, where relationships with connected companies are concerning or fuzzy, or in cases where the directors have too many other directorships to be reasonably expected to fulfil their responsibilities to the board.
Fundraising is the other key issue leading to no votes by minority shareholders in Hong Kong listed companies. Changes in the capital base, particularly cases where private placements at discounted prices have diluted the stakes of existing minority shareholders, have made up roughly half of the opposition votes since January 2015.
This year has witnessed a headline-garnering lawsuit from Elliott Investors, which is suing Bank of East Asia (BEA) for diluting Elliott’s stake in the Hong Kong-headquartered bank via a private placement of new shares to Japan’s Sumitomo Mitsui Banking Corp. It was also fighting similar arrangements with Spain’s Criteria Caixa. Elliott says these arrangements were made to protect BEA from a takeover bid and thus keep the company in the control of the founding Li family. This protection against a potential takeover is not in the interest of other shareholders, according to Elliott, which had a 7% stake at the time it filed its lawsuit over the summer. The Li family has vowed to vigorously defend its right to seek alliances with Criteria Caixa and Sumitomo.
While Sydorowitz does not expect such dramatic showdowns to be all that frequent, he does expect investor engagement to continue to deepen in the region. Companies need to do more to confront this reality – and by doing so, may lower the odds of ending up in a battle with activist campaigns. Sydorowitz’s suggestions to corporate clients include the following.
Enhance engagement. ‘Activists are shareholders so you should treat them like you treat other shareholders; talk to them,’ says Sydorowitz. ‘As a shareholder, they have a specific view and most know the companies they invest in far better than some of the big investors…. They often pick a company because they believe there is unlocked value.’
Undertake due diligence. ‘Do your own due diligence on the activist. Understand what materials they use to form their thesis,’ says Sydorowitz, adding that while most activist investors tend to be savvy and knowledgeable, the fact is they are outside the company, and do not have at hand as much information and insight as management does.
Study the tactics. Understand the type of campaigns the activists are running – do they use the media as a stalking horse or speak to management behind the scenes, for instance.
Develop and maintain a relationship throughout the year. ‘That sounds obvious, sounds like motherhood and apple pie, but too often companies don’t have a regular engagement with investors, and only go to them on a transaction-by-transaction basis,’ says Sydorowitz.
Sydorowitz notes that the company secretary plays a pivotal role in preparing companies for AGMs and other engagements with investors. ‘They have all the components to make sure there is a good event,’ he says, adding that besides engaging with clients they need to maintain good relations with other client-facing agents of the business, such as investor relations. ‘The last thing you want is three or four entities reaching out to investors and telling them different things,’ he said.
Company secretaries need to know their shareholders and understand who votes and who does not vote at shareholder meetings, and be ready to answer queries concerning everything from the earnings forecast spread amongst the analysts to the company’s performance relative to peers.
A new type of tyranny?
Aware as he is that passive investors are increasingly engaging in activist activity, Sydorowitz read with interest a much-shared opinion piece that ran in the Wall Street Journal (www.wsj.com) in October this year, regarding the ‘tyranny of the passive investor’. The article, ‘Meet the new corporate power brokers: passive investors’, quoted Daniel O’Keefe, an active manager, as saying: ‘The tyranny of passivity is you have large pools of money that are unengaged in their investments,’ which he argues is ‘a far greater risk than the tyranny of activism’.
This is a change of perspective. Activist investors, such as Paul Singer or Carl Icahn, have long struck fear in the hearts of companies and have sometimes been described as bullies. If executives or board members saw such investors take stakes in their firms, often it meant trouble was on the horizon. However, passive investors own a lot more of the listed universe than the niche of activist investors. With these stakes come voting power, so companies like Vanguard and BlackRock have appointed employees who focus exclusively on governance issues. As Vanguard’s Glenn Booraem was quoted as saying in the Wall Street Journal piece: ‘We’re riding in a car we can’t get out of. Governance is the seat belt and air bag’.
Interestingly, passive investors sometimes use their clout to unite with corporate management – and fend off campaigns by activist investors. On Wall Street, one of the world’s biggest passive investors – the index-fund firm Vanguard – voted against a move by the activist Jeffrey Osher to remove the chief executive officer of Green Dot Corp, a California-based prepaid-card company.
This serves as a reminder as to why engagement with investors is crucial for companies. Not only might such engagement help head off unwanted activist campaigns, but could also help listed companies to find allies among institutional investors in defending against such campaigns. ‘Once you spot the activist investor, it’s too late,’ says Sydorowitz. ‘Investors want an open-door engagement with management, and we’re seeing more of it.’
This is partly driven by the increasing number of institutional investor guidelines promoting shareholder/issuer engagement, such as the Stewardship Code published by the UK’s Financial Reporting Council in 2010.
‘Investors are encouraged to engage with other investors. They’re asking their peers in the market what they own and why. Companies need to be aware of that and be engaged in that,’ says Sydorowitz.